A comprehensive ppt on Inventory Management by students of ERA BUSINESS SCHOOL, New Delhi; PGDM batch (2012-14)

1. INVENTORY
MANAGEMENT
Origin : 1375–1425; Late Middle English
‘inventorie’ and ‘inventorium’ in Latin.

2. AIM
• Aim of this presentation is to introduce the
topic of Inventory Management to an already
stressed, hard-pressed and unsuspecting class
of students.
(presented by Sneha, Atul & Ajay K Raina)

3. SCOPE
• Part 1 – Basic Concepts.
• Part 2 – Systems and Methods.
• Part 3 – Miscellaneous Aspects.
• Interactive Session and Conclusion.

4. PART 1 – BASIC CONCEPTS

5. INVENTORY : FIN ACCTG
• The assets that are:– Held for sale in the ordinary course of business; or
– In the process of production for such a sale; or
– In the form of materials or supplies to be
consumed in the production process; or
– In the rendering of services.
• Relevance : Trading concern & Manufacturing
unit.
• Loose tools v/s spares.

6. TYPES OF INVENTORY…
Work in
process
Vendors
Raw
Materials
Work in
process
Work in
process
Finished Customers
goods

7. …….TYPES OF INVENTORY
• Raw Materials – Basic inputs that are converted
into finished product through the manufacturing
process.
• Work-in-progress – Semi-manufactured products
that need some more work before they become
finished goods for sale.
• Finished Goods – Completely manufactured
products ready for sale.
• Supplies – Office and plant cleaning materials that
do not directly enter production but are necessary
for production process and do not involve
significant investments.

8. RELEVANCE : INVENTORY
• Constitute significant part of current assets.

9. CURRENT ASSETS
• Realised or consumed in the operating cycle.
• Held primarily for trading.
• Cash or cash-equivalent.
(An asset which is not a current asset is classified as a non current asset)

10. RELEVANCE: INVENTORY
• Constitute significant part of current assets.
• On an average, inventory forms approx 60% of
current assets in Public Limited Companies in India.
• Huge financial implications.
• Effective and efficient management is imperative to
avoid unnecessary investment.
• Improper inventory management affects long term
profitability and may cause failure ultimately.
• 10 to 20% of inventory can be reduced without any
adverse effect on production and sales by using
simple inventory planning and control techniques.

11. INVENTORY MGT
 The act or manner of managing, handling, directing or
controlling the flow of inventory.
NEED :• Demand related:-
– Meet unexpected demands.
– Smooth seasonal or cyclical demands.
• Pricing related:– Hedge against price increases.
– Take advantage of quantity discounts.
• Process and supply surprises related:– Internal – upsets in parts of or our own processes.
– External – delays in incoming goods.

12. OBJECTIVES: INVENTORY MGT
• To maintain an optimum size of inventory for
efficient and smooth production and sales
operations.
• To maintain a minimum investment in inventories to
maximize the profitability.
• Effort should be made to place an order at the right
time with right source to acquire the right quantity
at the right price and right quality.

13. SUCCESS MANTRA
• Ensure a continuous supply of raw materials to
facilitate uninterrupted production.
• Maintain sufficient stocks of raw materials in
periods of short supply and anticipate price
changes.
• Maintain sufficient finished goods inventory for
smooth sales operation, and efficient customer
service.
• Minimize the carrying cost and time.
• Control investment in inventories and keep it at an
optimum level.

14. WHAT IF WE OVER REACT?
• Unnecessary tying down of firm’s funds and loss
of profit.
• Excessive carrying costs.
• Risk of liquidity- difficult to convert into cash.
• Physical deterioration of inventories while in
storage due to mishandling and improper
storage facilities.

15. WHAT IF ONE IS TOO COOL!
• Production hold-ups – loss of labour hours.
• Failure to meet delivery commitments.
• Customers may shift to competitors which will
amount to a permanent loss to the firm.
• May affect the goodwill and image of the firm.

16. IN A NUTSHELL
• Track inventory.
• How much to order?
• When to order?
• IF we know the
value, all these
functions will get
addressed!!
BTW,…it is tough to do inventories in Afghanistan because of the tally
ban.

17. PART 2 – SYSTEMS & METHODS

18. INVENTORY SYSTEMS
Factor
Periodic Inventory System
Perpetual Inventory System
Basis of ascertaining inventory By actual physical count
On the basis of records
Calculation of inventory
Directly by applying the
method of valuation of
inventories
Closing Inventory = opening
inventory+ purchases – cost of
goods sold
Calculation of cost of goods
sold
Cost of goods sold = opening
inventory + purchases –
closing inventory
Directly calculated by applying
the method of valuation of
inventories
Lost Goods
Cost of goods sold includes
cost of lost goods (if any)
Cost of closing inventory
includes cost of lost goods (if
any)

19. METHODS OF VALUATION
An inventory valuation allows a company to provide
a monetary value for items that make up its inventory.
Methods:-
• First In First Out (FIFO) Method.
• Last In First Out (LIFO) Method.
• Weighted Average Cost/price Method.

20. FIFO METHOD
• Based on the assumption that the goods that are
received first are issued first.
• For purpose of assigning costs and not exactly for
purpose of physical flow of goods.
• Goods sold, thus, consist of earliest lots and are
valued at the price paid for such lots.
• The ending inventory consists of latest lots and is
valued at the price paid for such lots.
• Balance sheet shows ending inventory costed as per
approx market price.

21. FOR EASE OF ASSIMILATION
(QUESTION) – ABC Ltd. Provides you with the following
information :
- 1.1.20 11 Opening Stock 100 units @ Re 1.
- 2.1.20 1 1 Purchased 400 units @ Rs 1.50.
- 3.1.20 1 1 Issued 450 units.
-4.1.20 11 Purchase 500 units @ Re 2.06.
- 5.1.2011 issued 300 units.
REQUIRED : Compute the value of inventory and cost of
goods sold as on 5.1.2011 assuming:(a) Perpetual system; and
(b) periodic system under FIFO method.

22. 1…STOCK LEDGER UNDER FIFO METHOD
DATE
RECEIPTS
Quality
1-12011
400
3-12011
_
BALANCE
Amt.
(Rs)
Quality
Rate
(Rs)
Amt.
(Rs)
Quality
Rate
(Rs)
Amt.
(Rs)
_
_
_
_
100
1.00
100
1.50
600
_
_
_
100
400
1.00
1.50
100
600
_
_
100
350
1.00
1.50
100
525
50
1.50
75
50
500
1.50
2.06
75
1,030
250
2.06
515
Rate
(Rs)
_
2-12011
ISSUES
4-12011
500
2.06
1030
_
_
_
5-12011
_
_
_
50
250
1.50
2.06
75
515

23. 2a… PERPETUAL SYSTEM
Closing inventory calculated as residual figures:- Opening inventory
- Add: Purchases (₹
600+Rs.1,030)
- Less: Cost of good sold
(₹
515+75+525+100)
- Ending inventory (A+B-C)
100
1,630
1,215
₹
515

24. 2b… PERIODIC SYSTEM
Cost of goods sold is calculated as residual
figures:- Opening inventory
100
- Add: Purchase(₹
600+1030)
1,630
- Less: Ending inventory
(250 x ₹
2.06)
515
- Cost of goods sold (A+B-C)
₹
1,215

25. LIFO METHOD
• Based on assumption that goods that are received
last are issued first.
• Assumption made for purposes of assigning costs
and not for actual physical flow of goods.
• Flows of goods and costs may not coincide.
• Goods sold, thus, consist of the latest lots and are
valued at the price paid for such lots.
• The ending inventory consists of the earliest lots
and is valued as such.
• Balance sheet has an inventory costed at old prices.

26. RETRACING OUR STEPS A BIT
(QUESTION) – ABC Ltd. Provides you with the following
information :
- 1.1.20 11 Opening Stock 100 units @ Re 1.
- 2.1.20 1 1 Purchased 400 units @ Rs 1.50.
- 3.1.20 1 1 Issued 450 units.
-4.1.20 11 Purchase 500 units @ Re 2.06.
- 5.1.2011 Issued 300 units.
REQUIRED : Compute the value of inventory and cost of
goods sold as on 5.1.2011 assuming:(a) Perpetual system; and
(b) periodic system under LIFO method.

27. 1…STOCK LEDGER UNDER LIFO METHOD
DATE
RECEIPTS
Quality
1-12011
400
3-12011
_
BALANCE
Amt.
(Rs)
Quality
Rate
(Rs)
Amt.
(Rs)
Quality
Rate
(Rs)
Amt.
(Rs)
_
_
_
_
100
1.00
100
1.50
600
_
_
_
100
400
1.00
1.50
100
600
_
_
400
50
1.50
1.00
600
50
50
1.00
50
Rate
(Rs)
_
2-12011
ISSUES
4-12011
500
2.06
1030
_
_
_
50
500
1.00
2.06
50
1,030
5-12011
_
_
_
300
2.06
618
50
200
1.00
2.06
50
412

28. 2a… PERPETUAL SYSTEM
Closing inventory calculated as residual figures:- Opening inventory
- Add: Purchases (₹
600+Rs.1,030)
- Less: Cost of good sold
(₹
600+50+618)
- Ending inventory (A+B-C)
100
1,630
1,215
₹
462

29. 2b… PERIODIC SYSTEM
Cost of goods sold is calculated as residual
figures:- Opening inventory
100
- Add: Purchase(₹600+1030)
1,630
- Less: Ending inventory
(150 x ₹2.06)
462
- Cost of goods sold (A+B-C)
₹ 1,268

30. WEIGHTED AVERAGE PRICE METHOD
• Based on the assumption that each issue of goods
consists of a due proportion of the earlier lots and is
valued at weighted average price.
• Weighted average price is calculated by dividing the
total cost of goods in stock by the total quantity of
goods in stock.
• This weighted price is used for pricing the issues
until a new lot is received when a new weighted
average price would be calculated.
• This method evens out the effect of widely varying
prices of different lots that make up stocks.

31. FOR BETTER UNDERSTANDING
TOTAL
COST in ₹
Units available
Sale
Purchase
Total
1.
2.
3.
--
2.10
210
75
--
--
150
--
2.80
420
100
--
--
50
--
3.00
150
300
Purchase
100
--
Sale
Per unit cost
--
Opening inventory
Units sold
175
The weighted-average cost per unit is ₹
780/300 = ₹
2.60.
Ending inventory is 125 units (300 – 175) at ₹
2.60 = ₹
325;
Cost of goods sold (ie 175 units at ₹
2.60) = ₹
455.
780

32. PART 3 – MISCELLANEOUS ASPECTS

33. CLASSIFICATION OF INVENTORY
•
•
•
•
•
•
•
•
ABC Classification(consumption) (25/80+15/15+70/05)
XYZ Classification(value stored) (Hi,Med,Low)
HML Classification(unit-value stored) (Hi,Med,Low)
VED Classification(spare parts mainly) (Vital,Ess,Des)
FSN Classification(consumption) (Fast, Slow, Non)
SOS Classification(agriculture) (Seasonal, Non)
SDF Classification(availability) (Scarce, Difficult, Easy)
GOLF Classification (source of supply) Govt, Ordinarily
available, Local and Foreign)

34. EMERGING TRENDS IN INVENTORY
MANAGEMENT
• Entering into long term contracts at a fixed price
to reduce uncertainties.
• Just-in-time.
• Kanbans – Japanese technique (Only produce
when demand comes).
• Internet based ordering systems.
• Supply chain management.
• Vendor development.
• Investment in plant and machinery.

35. INVENTORY CONTROL RESPONSIBILITY
• Purchasing naturally has vest interest in
inventories, even to the extend that in some
companies the purchasing and stores functions are
combined. the responsibility cannot be kept
In effect,
• Production looks after the workmanagement
on one head since inventory in progress.
• Logistics plays a major role ineffort
is an integrated inventory control
• Inventories are economic importance to finance
department.
• The fact that materials must be moved from one
place to another is of importance to materials
department.

36. ANY QUESTIONS?

37. THANK YOU